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Carl Lamb: DB transfers are the advice sector’s greatest risk

Cashflow modelling and a meticulous approach to risk are essential to avoid a suitability crisis

The debate about whether or not defined benefit scheme members should transfer out continues on its rollercoaster ride.

There are so many facets to the discussion and FCA guidance, although useful to an extent, is still not sufficient to make me trust that properly considered cece given now will not end up as the subject of future claims.

Some firms have plunged themselves into the DB transfer market and there is undoubtedly money to be made. However, I remain sceptical about the advisability of transferring in the vast majority of cases and am adamant we will almost always advise against it.

Let’s face it: those who have built up considerable DB pension benefits are often those who have been safely employed by a single large employer for many years.

They are frequently not risk-takers and are used to a steady, reliable income stream.

A DB transfer may be a fundamental shift in mindset for them and it is absolutely essential to adopt a defensive, cautious approach to your advice if they present with limited knowledge and experience. Anything less and you are inviting future unsuitability claims.

That is not to say we will not look at the feasibility of a transfer. Transfer values remain at an all-time high so, yes, in some cases, it will make sense. The point is that the client’s options must be thoroughly explored.

Cashflow critical

The FCA has confirmed these decisions must not just be based on critical yields but that we must also consider potential returns on new investments made with the transferred pot. I absolutely support that requirement and would go further: a full exploration of future scenarios through cashflow modelling and education about risk are critical.

Unlike many firms, we are not promoting our DB transfer service and will only accept the responsibility for evaluating a case on the basis of a fully advised process.

Both the process and the fee are inflexible and we will not execute a transfer if we have decided it is contrary to the client’s best interests. Stressing this to the client at the outset helps reinforce the message that this is a really important, life-changing decision and our advice is ignored at their peril.

I am aware some firms are outsourcing the DB transfer report creation, then advising the client on the basis of that.

This seems to be a muddying of the waters that will just make future claims both more likely and more complex. Who is later liable for the advice given?

I am also concerned some advice firms are advising on the DB transfer without taking on the client’s ongoing advice needs. Again, this is splitting the responsibility for the advice.

Would a future claim consider the transfer itself or the ongoing investment strategy responsible for failing to provide sufficient funds for the client’s long retirement? It is likely one adviser would blame the other.

DB transfer decisions remain the single greatest risk to the advice sector. I am certain they will come back to bite us in the future.

All we can do is be meticulous in the way we handle any requests, act with professionalism rather than giving in to overriding commercialism and, sadly, charge a fee that reflects the risks we are taking even discussing the topic with clients.

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19th November 20182:58 pm

Comments

There are 10 comments at the moment, we would love to hear your opinion too.

Not a good advert for the firm he works for. Blanket no advice and inflexibility on fees. Most employees who have built up a DB entitlement also have DC pots elsewhere and are used to managing those pots by picking funds with an adviser. He’s treating people as unsophisticated, unsavvy and unaware. He’s also arrogant enough to predict the future.

Its funny how we can all interpret an article differently. The approach Carl is advocating is start off thinking its not a good idea, if you can provide the evidence to refute that and show that it is a good idea, then go with that. Doesn’t read as “blanket no advice” and frankly, just seems like what the majority of IFAs are doing? Also find it funny that people like to comment on other adviser’s fees. We too have a set fee for the advice re suitability of DB transfers, the research involved is the same whether we transfer or not. What do you propose, a % of the transfer value on implementation and a % ongoing once you get the AUM?

“I am also concerned some advice firms are advising on the DB transfer without taking on the client’s ongoing advice needs. Again, this is splitting the responsibility for the advice.

Would a future claim consider the transfer itself or the ongoing investment strategy responsible for failing to provide sufficient funds for the client’s long retirement? It is likely one adviser would blame the other.”

I speak as a customer. Not as an adviser. Inaction also comes with risks. Ask BHS deferred pensioners.
How could an adviser who gives advice on a transfer out could possibly be held liable for subsequent investment performance in a SIPP. The instruction to the adviser is limited to advice on the transfer out. That is the limit of the instruction.
The cost of DB transfer out advice is IMHO inflated unfairly by the perceived risk of future claims.

Hi Phil, yes of course there is that risk. If the level of scheme funding is also taken into account with regards to the transfer then we can take that into account. The pension protection fund also adds a level of protection. I’d also say that if you are looking for advice on a DB transfer the advice shouldn’t simply be limited to that in isolation but the overall retirement planning, how can you possibly ascertain if it is the right thing to do without taking into account other factors? You call it an instruction but that’s not what getting financial advice is. With regards to the cost of DB transfer advice, i would perhaps agree that some fees charged are over the top but when you factor in all of the costs; The level of qualification needed to advise on such a thing, the increased PI costs for a firm that undertakes this work, the simple man hours put into the in depth planing and of course, the risk of future claims against the suitability of the advice. Most firms probably charge fairly for that but unfortunately, if you’re speaking as a customer, people just think they’re paying for a bit of paper with words on it.

Phil says “How could an adviser who gives advice on a transfer out could possibly be held liable for subsequent investment performance in a SIPP. The instruction to the adviser is limited to advice on the transfer out. That is the limit of the instruction.”

Well that’s just totally inconsistent with what the FCA’s been saying for nigh on five years now (and it wasn’t a new thing when they spelled it out).

If you wanted evidence of why customers need advice on such life-changing decisions – well, here’s one that needs your advice.

First you must define misselling. If the client has a bad outcome it does not mean the advice was flawed but Has someone who based on their situation is advised to transfer but then spends the money like a sailor on leave been missold ? If someone who was advised to stay but dies within a year had bad advice? The FCA must not give the public the impression that getting regulated advice can take away the risk of making the wrong choice. All we can do is enable the client to make an informed decision and how well that is done should be the basis of any review of the advice.

I recently spoke to someone morbidly obese that didn’t expect to live to a great age and could use the tax free cash to pay off buy to let mortgages at 55. Given it would have taken over 50 years to pay out the transfer value in pension payments then a £1 million transfer was hard to resist. It also would mean leaving a lump sum to his widow rather than half the pension. Timing and circumstances makes all the difference and sometimes it’s a no brainer.

DB Transfers is a huge concern to me. Not because I do them, but because their are advisers out there simply putting them into Drawdown and not considering how much secured income the client requires. The problem for me is when these advisers bump their companies, have all their assets in their wives/husband’s name and leave the FSCS to pick up the tab – which then puts up my FSCS levy. It will be the next PPI.